Piketty – in French it’s worse

Thomas Piketty’s now much lauded book, Capital in the 21st century, was actually published in French last summer.  But it did not receive the overwhelming plaudits that American and British mainstream and leftist economists have given it (see http://www.nytimes.com/2014/04/30/upshot/why-pikettys-book-is-a-bigger-deal-in-america-than-in-france.html).  Indeed, several French critics commented that Piketty’s data on the inequality of wealth in modern capitalist economies was good to have, but so what?  Surely, everybody knows that capitalism generates inequality – what’s new about that.  Some Americans reckon the French attitude is because Piketty is seen as too ‘meritocratic’, which is frowned on in France! (http://www.foreignpolicy.com/articles/2014/04/28/france_thomas_piketty_capital_in_the_twenty_first_century).

Thanks to some readers for pointing to some French critics who have come up with several perceptive critiques of Piketty’s book that make many of the points that I have made in my review for Historical Materialism (submitted, but not yet accepted – see my post (https://thenextrecession.wordpress.com/2014/04/28/reviewing-piketty-again/) and often better than I have.  They are all in French, so Anglo-Saxons do not read them.

In particular, there is a paper by Bonnet, Bono, Chapelle and Wasmer wp-25-bonnet-et-al-liepp, which concentrates on Piketty’s data.  The paper points out that valuing housing by movements in property prices rather than in rental equivalents exaggerates the rise in capital share of national income significantly.  I think valuing ‘housing services’ with some synthetic concoction does not work at all.

Even more decisive is an article by French Marxist economist Michel Husson who says that in Piketty’s first ‘fundamental law of capitalism’ the causality is the wrong way round (see http://www.contretemps.eu/interventions/capital-xxie-si%C3%A8cle-richesse-donn%C3%A9es-pauvret%C3%A9-th%C3%A9orie).  Husson points out that Piketty says that the share going to profit as opposed to wages depends on the ratio of total capital to income times the net rate of return.  But Marx says that what matters is how you get the rate of profit.  That changes Piketty’s equation to the net rate of return (r), or the rate of profit, is equal to share going to profits over wages (the rate of exploitation) divided by total capital. Piketty’s version shows he is only interested in the share going to profit and assumes a rate of return to do it. He has no theoretical explanation of how this r is reached.  Piketty is interested in distribution of income or value in a capitalist economy not in its production.  So he ignores Marx’s law of value.

Husson also points out that Piketty’s merging of the definition of capital, as Marx sees it, into wealth, by including housing and personal financial assets, distorts the real laws of motion on capitalism.  And his use of the neoclassical aggregate production function model to project the likely development of inequality of wealth assumes an equilibrium growth path for capitalism without crises, booms of slumps, or events like the Great Recession.  In the end, Piketty dispenses with neoclassical capital theory and just relies on historical data for his results.

These are points that I also make in my review.  Some readers have asked for a bullet point summary of that review.  So here it is:

1) Piketty shows compellingly that inequality of wealth and income is getting higher. And the reason is a rise of income going to capital in the form of profits, rent and interest, not due to higher skilled labour getting higher income than the lower skilled. And the rising capital income ratio is driven mainly by inherited wealth; from rags to riches is not the story of capitalist wealth; it is more from father to son or from husband to widow.

2) But then he tries to develop some ‘fundamental laws of capitalism’ and comes a cropper.  He conflates capital into wealth by including non-productive assets like housing and stocks and bonds in his measure.  In doing so, he loses sight of how wealth is created and appropriated, as Marx shows with his law of value.  And his net rate of return on capital becomes separated from the capitalist process of production.  Indeed, if you strip out housing and financial assets from his measure of the rate of return, you get Marx’s rate of profit and it falls (and moves up and down), unlike Piketty’s ‘steady’ r.

3) He uses the neoclassical aggregate production function to project how economic growth and wealth might develop over the long run, ignoring the longstanding faults in this model which assumes perfect substitution of capital for labour, even though capital in the model is not measurable.  Then he drops the model and relies on a straightforward projection of his data.

4) He has no theory of crises and assumes they are passing phenomena.  So his policy prescriptions are confined to progressive taxation and a global wealth tax to ‘correct’ capitalist inequality.  The replacement of the capitalist mode of production is not necessary – in true social democratic fashion.

If Piketty had stuck to presenting his ‘wealth’ of data on inequality of wealth as being even more relevant than inequality of income under capitalism, that would be a contribution.  But he wants to do more: to correct Marxism and replace it with his own ‘fundamental laws’ that imply capitalism can be made to work with suitable political action to reduce inequalities. This is why he is greeted with acclaim among Anglo-Saxon mainstream economics when translated into English and why, perhaps, he does not get quite the same accolades in French.
Okay, that’s the last post on Piketty.
Piketty on Marx:

Can you talk a little bit about the effect of Marx on your thinking and how you came to start reading him?

TP: Marx?

IC: Yeah.

TP: I never managed really to read it. I mean I don’t know if you’ve tried to read it. Have you tried?

IC: Some of his essays, but not the economics work.

TP: The Communist Manifesto of 1848 is a short and strong piece. Das Kapital, I think, is very difficult to read and for me it was not very influential.

IC: Because your book, obviously with the title, it seemed like you were tipping your hat to him in some ways.

TP: No not at all, not at all! The big difference is that my book is a book about the history of capital. In the books of Marx there’s no data.

12 thoughts on “Piketty – in French it’s worse

  1. Not a comment, but I do believe that Piketty is overrated on several scores. Successes normally are (so say we…). I will review it in due course in Danish and probably pik (sic) on everybody’s brain. Thomas Palley’s latest blog is not bad either. But a question: Michael, have you read Costas Lapavitsas’ book Profiting without Producing: How Finance Exploits Us All. I am just finishing it and a little ambivalent about it.

  2. “He conflates capital into wealth by including non-productive assets like housing and stocks and bonds in his measure.” But see: Alan Freeman, The profit rate in the presence of financial markets: a necessary correction. Journal of Australian political economy no 70.

    1. Hi Thomas, yes I have read Alan’s piece and commented on it at the time he published. I dont think he is right to include financial assets without also including financial liabilities. Otherwise it is double counting assets twice, once as tangible assets and once as the financial assets that represent those assets. At least Piketty did use net assets. I experimented with calculating the rate of profit using net financial assets in a paper entitled, Debt matters, see my post, https://thenextrecession.wordpress.com/2012/11/12/monsters-delusions-of-debt-and-the-crisis/ I was not happy with that even so.

    2. Just as info: The Deutsche Bundesbank (German Federal Bank) has “annual result and interest paid” (profit) as “percentage of the Balance sheet total” (“capital”) in “Ratios from financial Statements of German enterprises 2004 to 2005”

  3. Michael, do you see yourself or other Marxist economist taking all the data that’s been compiled by Piketty, and doing a publishing your own evaluation of said data? Right now seems to be the opportune time to write a critique of modern capitalism, a true update to Marx. From reading your hood and similar blogs, crises, income inequality, and the intergenerational transfer of large amounts of concentrated wealth are all structural phenomenon. Somebody needs to show that the capitalism needs to be replaced and that reforms do not inhibit the exploitation and repression that are part and parcel of the wage systems.

    1. Jim, that’s big task, using Piketty’s data. Esteban Maito, see my post, has a little go at that. I hope to publish a new book next spring outlining my overall view on capitalism in the 21st century.

  4. Mr. Michael, this is a window I found in your blog to tell you I have a paper not published yet which is about a new way of analysing and measuring the inequality of incomes. I would like to send it to you, as I did with others, for your comments.

  5. All the wrong people like Pikkety. If you have M Yglesias types singing your praises then you are doing something wrong, even as a progressive.

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